At the Open: New Records for S&P 500, Dow Jones Industrials?

By Ben Levisohn

Is it time to pop the champagne and celebrate new stock market highs? Maybe.

Fred Dufour/Agence France-Presse/Getty Images

The Dow JonesIndustrials have risen 0.2% to 15,781.75 at 9:51 a.m.-a record high–lifted by the Home Depot (HD), which has gained 0.9%, and General Electric (GE), which has risen 0.7%. The S&P 500, however, has dipped ever so slightly to 1,770. JC Penney (JCP) jumps 7.1% to $8.25 on better same-store sales, and Tesoro (TSO) climbs 5.7% after releasing earnings.

Headline GDP 2.8%; GDP ex inventories 2%; GDP ex inventories ex net exports 1.7%. Headline much stronger than expected, but the breakdown was less promising because 1)inventories added more than expected, and many street analysts will see this as unintended and therefore subtracting from GDP next qtr; 2) some of the strength reflected govt subtracting less than expected led by strength in state and local govt; and, 3) non-residential investment was poor at -3.7%. Elsewhere consumption growth was still very modest at 1.5%, albeit led by soft services and the more cyclical durables were solid. The data breakdown does not point to any underlying acceleration in growth, although as noted yesterday key leading indicators suggest limited risks of stalling and greater risks of a moderate acceleration in the months ahead.

Also giving stocks a boost: The European Central Bank’s decision to cut its benchmark interest rate to 0.25 percentage point. Societe Generale’s Kit Juckes explains why the ECB still needs to do more:

As far as policies to revive nominal growth in Europe are concerned, I stand by a view that the ECB simply doesn’t have the armoury that is available to the Fed. I would prefer to see the ECB buying a lot of government debt than see LTROs encourage banks to buy government bonds, some of which can happen at the expense of private sector loan growth. Without more credit growth the Euro area will continue to stagnate, especially given the degree of fiscal austerity that is still required by the rules the system lives by. And that is why I think we will see more easing, within the limits of what the ECB can do – starting with another LTRO next year. But I would still describe this as a pea-shooter policy because it would take ECB government bond-buying to constitute ‘bazooka’. Still, I have a huge amount of respect for the Draghi regime at the ECB, which started with a surprise rate cut, moved on to the LTRO, shocked us with the ‘anything it takes’ comment and continues to surprise. He is incredibly imaginative and innovative, even if he is isn’t armed with big enough weapons….

The cut caused the euro to fall against the dollar, and the days of a rising falling euro being bad for the stock market appear over. While the 120-day correlation between the S&P and the euro was as high as 60% just one year ago, it’s now just 11%. The higher the correlation the greater the tendency to move in the same direction.

With the S&P closing at 1,770 yesterday and having earned, according to S&P, about $102 over the last 12 months, each $1 of earnings is valued at roughly 17.3 Index points. That places the value of the ~$8 difference, between the prevailing $118.64 NTM estimate and the $110.25 that will likely be when actuals are reported, as 145 Index points (8.39 x 17.3 = 145) or about 8 percentage points of Index value. This would be the risk to the market if a moderation in the slope of earnings estimate initiation – all other things being equal – began today.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.